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Beyond Facebook

| July 26, 2018

While the Facebook earnings letdown gathers all the headlines today (at least amongst the few that apparently still use Facebook!), there is encouraging news currently unfolding below the surface this earnings seasons. With nearly a third of S&P 500 companies having reported thus far, second quarter (Q2) results are showing impressive strength, highlighted by strong momentum in top-line revenue growth.

(Readers relatively uninterested in lots of numbers and charts can stop at this point. The opening paragraph essentially captures the story. Those interested in the nuts and bolts may continue on.)

Digging a little deeper into the numbers, total earnings for the 147 S&P 500 members (accounting for 41% of the index’s total market capitalization) that have reported Q2 results are up over 23% on over 9% higher revenues. Additionally, 84% of these companies are beating earnings estimates and 75% are beating revenue estimates.

The proportion of these companies beating EPS and revenue estimates is tracking above other recent periods, with revenue beats at this stage tracking an amazing 15 percentage points above the trailing 12-quarter average. Needless to say, this is a very strong showing from companies representing over 40% of the S&P’s market cap, as shown in the graphs below.

In spite of Facebook, the technology sector is otherwise well-represented as we await the Apple and Amazon results. The “Alphabet formerly known as Google” reported a near earnings double on more than 25% top-line (revenue) growth. Redmond stalwart Microsoft earnings are up well over 14% from the same period last year on almost 22% higher revenues.

The transportation sector is another standout. With results from over 80% of the sector’s total market cap in the S&P 500 index reported, transportation earnings are up nearly 25% on almost 10% revenue growth. Every company in the sector is beating EPS and revenue estimates.

Finance sector earnings are expected to be up over 24% from the same period last year on 4.4% higher revenues. Other major sectors with strong expected growth in Q2 include energy (+138.9% earnings growth), basic materials (+53.1%), industrial products (+28%) and even Amazon-challenged retail (+18.4%). We could go on, but the point is clear – the U.S. economy is humming along, and earnings reflect that strength.

Combining the actual results from the 147 index members with estimates from the 353 remaining, total Q2 earnings are expected to be up over 22% from the same period last year on 8.4% higher revenues. This would be the 3rd quarter in a row of double-digit earnings growth for the index, a trend that is currently expected to continue in the second half of the year as well.

Consistent with MPCA portfolio exposure to the small-cap end of the domestic economic spectrum, total Q2 earnings for the S&P 600 are expected to be up nearly 29% on 8.4% higher revenues, which would follow over 24% earnings growth on 8.6% revenue growth in the first quarter of the year.

The chart below contrasts the expected Q2 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming four periods. Earnings growth remains robust, even as we expect a deceleration from the lofty and unsustainable level catalyzed by the tax-reform spike in the first quarter.

Is there a potential fly in the ointment in the otherwise sunny outlook? Perhaps. We are currently monitoring trends in earnings revisions, which have been underwhelming of late, particularly relative to what we experienced in Q1. We will be paying attention to Q3 estimates as companies report Q2 results and share their outlooks on current business trends, given the ongoing strength in the U.S. dollar, questions about the global economy and all-around trade uncertainty.

A gold star to readers enduring to the end. You may resume your summer activities.